Compliance Procedure and Substantial Procedures (5 Marks June 2010, June 2014) Or
Explain the compliance procedure and substantial procedures as Audit methods of collecting evidences for forming an audit opinion.
Auditor should obtain sufficient and appropriate audit evidences and test them before framing an opinion about the assertions the financial statements reveal. For this, the auditor checks evidences through
Compliance procedure and
Compliance procedures are tests designed to obtain reasonable assurance that those internal control on which audit reliance is to be placed are in effect. It seeks to test that
there exists internal control,
the existing internal control is effective and
the internal control is working without break or lacunae during the period under review.
When internal control is found to be to an acceptable level, the accounting entries generated in such a system is more reliable than in one where the control is weak.
Mere satisfaction about the existence of internal control may not be sufficient for auditors to express opinion about the assertions the financial data in the form of balances and transactions.
These i.e. transactions and balances need to be tested. This is done audit procedure called substantive checking. Substantive procedures are designed to obtain audit evidence as to the completeness, accuracy and validity of the data produced the accounting system.
The substantive procedures involve
checking of transactions and balances and
The checking of transaction and balances involves vouching of sales, purchases, payments, receipts and scrutiny of ledgers. The analytical procedure involves critically examining the accounts in an overall manner and it may entail computation of ratios, trend analysis so as to dwell in length for examination of unusual or unexplained deviations.